You would think that if there were one lesson we could confidently take away from the credit crunch, it would be, “Don’t lend money to subprime borrowers if you think they won’t be able to repay it.” So easy to remember! But no:
Well, it’s time to roll the dice again. According to the 5-4 majority opinion at the U.S. Supreme Court on Thursday, housing lawsuits based on race no longer need proof of intentional discrimination.
In other words, even defendants with no racist intent can be sued for racist outcomes if a plaintiff can prove “disparate impact.” That’s when a race-neutral policy results in negative outcomes for an identifiable minority. [Emph. added.]
It is exceedingly difficult for a lender to intentionally discriminate on the basis of race, by the way. There is no checkbox for race or ethnicity on the typical mortgage or car-loan application. Often, the application is done on-line or via a third party such as an auto dealer or mortgage broker, so a representative from the lender doesn’t even know what the prospective borrower looks like. Oh, and discrimination by race in lending is illegal, so that the incentive to not engage in it is inordinately high. As if to underscore all this, Ally Bank, which reached an $80 million settlement with the CFPB last year over supposedly discriminatory practices in auto lending, can’t find a single victim to pay settlement money to.
All of which is to say, in this country, intentional racial discrimination in lending basically doesn’t happen: study after study has shown that if you adjust application data for relevant inputs like credit scores and loan-to-income ratios, whites and minorities are turned down at similar rates. But since minorities tend to have lower FICOs and incomes, in terms of raw numbers they tend to be turned down more often. That’s what “disparate impact” is, and now borrowers can sue if they think they’re a “victim” of it.
Wonderful. Going forward, banks can thus be counted on to bend over backwards to seek out and approve unqualified borrows, just to avoid lawsuits. Didn’t we all just learn the hard way that this is a bad idea? The end result will end up being bad for the borrower, bad for the economy, and bad for the financial system. And if the shoddy lending goes on on a wide enough scale, it might even end up being cataclysmic.
I’d assumed that everything we all learned from the credit crunch was pretty much well-understood all around. It’s discouraging to see that the lessons are starting to be forgotten already.
What do you think? Let me know!